Pros and Cons of Using a Personal Loan to Pay Off Credit Card Debt

Credit cards can be convenient for making purchases, but they can also be an expensive way to borrow if you're stuck with a high annual percentage rate (APR). Using a personal loan to pay off credit card debt could help you to pay back what you owe faster while potentially saving you money on interest. 

With a personal loan you can borrow a lump sum for almost any purpose, including debt consolidation. You could use a personal loan to pay off all of your credit cards, then make one monthly payment on the loan going forward. 

Wondering if a credit card debt consolidation loan might be right for you? Weighing the pros and cons can help you decide if using a personal loan to pay off credit card debt makes sense. 

Summary: Pros and Cons of Using a Personal Loan to Pay off Credit Cards

Pros:

• Potential savings

• Fixed interest rate

• Streamlined monthly payments

• Potentially lower monthly payment

• Possible credit score boost 

Cons:

• No guarantee of lower rates

• Associated fees

• Possibly higher interest charges overall

• May not help you if you rack up more credit card debt during the repayment period

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5 Benefits of Using Personal Loans to Pay off Credit Cards

Taking out a personal loan to pay off credit card debt can offer several advantages. If you're considering this option for paying off debt, it's important to consider how it might benefit your financial situation. 

1. Lower interest rate

Taking out a personal loan to consolidate credit cards could save you money if the loan has a lower interest rate than the average rate you're paying on your cards. Personal loan interest rates tend to average about 12%, while credit card interest rates average about 23%. The savings could be significant, especially if you have a very good or excellent credit score. This usually qualifies you for the lowest interest rates on personal loans.

Exact savings depend on the rate you qualify for and the loan repayment term. If you think a personal loan could be right for you, check with a few lenders to see what kind of interest rate and loan term they're willing to offer you.

2. No interest rate surprises

Personal loans typically have fixed interest rates. That means your rate stays the same over the life of the loan.

Credit cards, on the other hand, usually have variable rates. When rates go up, you’ll pay more interest if you carry a balance. Choosing a fixed-rate personal loan to pay off credit card debt means you don't have to worry about rate hikes.

3. Simplified payments

Using a personal loan to pay off credit card debt can make budgeting easier since you'll have just one payment. You can even schedule an automatic payment each month, eliminating the stress of tracking different due dates. 

4. Lower monthly payment

The monthly payment on your personal loan might be lower than the total of the minimum monthly payments you have to make on all of your credit cards. You might appreciate that if you're hoping to create some wiggle room in your budget. 

Your monthly personal loan payment will depend on how much you borrow, your interest rate, and the loan repayment term. The longer the term, the lower the payment is likely to be. 

5. Possible credit score improvement

Your credit utilization ratio has a big influence on your credit score. It's your credit card balances compared to your credit limits. If you have a $500 balance on a card with a $1,000 limit, your utilization ratio on that card is 50%. You have a credit utilization ratio for each card and overall.

This ratio doesn't take into account your balances on installment debt—debt with a regular monthly payment. For instance, if you have a car loan, it’s not reflected in your credit utilization ratio.

When you use a personal loan to pay off your credit card debt, you could reduce your credit utilization ratio. This could raise your credit score. The trick is to avoid putting new balances on those paid-off cards.

4 Drawbacks of Using Personal Loans to Pay off Credit Card Debt

Using a personal loan to pay off credit card debt isn’t right for everyone. There are some potential disadvantages to consider before moving ahead with a debt consolidation loan. 

1. No guarantee of lower rates

Lenders reserve the best interest rates for the most creditworthy borrowers. If your credit score isn't good or excellent, you might end up with a rate that's comparable to what you're already paying to your credit cards. 

2. Fees

Lenders can charge a variety of personal loan fees that add to your total cost of borrowing. Some of the fees to look for include:

• Application fees: Some lenders charge a modest fee just to apply.

• Origination fees:  This is typically 2-8% of the total loan amount, deducted from the funds before they are disbursed to you.

• Late payment fees:  You could pay these if the lender doesn't receive your payment by the due date.

• Prepayment penalties: This applies when you pay a loan off ahead of schedule. 

Not all lenders charge all of these fees for personal loans, but it's important to know what you'll pay before signing the loan paperwork. 

3. Possibility of paying more in interest overall

Choosing a longer loan term can lower your monthly payments when you use a personal loan to consolidate credit card debt. The longer you take to pay off the loan, however, the more interest you'll pay overall. 

4. Risk of increasing your total debt

Using a personal loan to consolidate credit cards can work in your favor—if you're not using your cards to make new purchases. 

If you pay off your cards using the loan and then charge them up again, you're not improving your financial situation. In fact, you may just be creating a deeper debt hole.

How to Find the Right Personal Loan for Debt Consolidation

Here are the basic steps to finding the best personal loan for credit card debt consolidation.

Gather important information

The first step is to understand your debt situation so you can determine if a personal loan is your best option. Make note of your balance and interest rate on all of your credit cards. You may also want to check your credit score to get an idea of where you stand. If you have good or excellent credit, you'll likely have access to better loan terms than someone with fair or poor credit.

Compare rates from lenders

Get pre-qualified with three to five personal loan lenders. You usually have to provide some information about your annual income and desired loan amount. You may need to give your Social Security number so the lender can check your credit. Be sure you’re talking to lenders who can check your rate with a soft inquiry that doesn’t affect your credit score. Then, the lender will tell you what it's willing to offer you.

The monthly payment and interest rate are understandably big concerns. But you also want to pay attention to associated fees and how much you'll pay in interest overall. Weigh each option before deciding which is best for you.

Apply for the loan

Once you've decided which personal loan company you'd like to work with, submit an application. Applying for the loan will impact your credit score (as the lender performs a hard credit inquiry), but usually means only a loss of a few points. It shouldn't take long for lenders to process your application. If you're approved, you'll usually have the money in your account within a week.

Pay off your credit cards

As soon as the lender deposits the personal loan funds into your account, pay off your credit card bills. Credit card interest accrues daily, so the quicker you do this, the less you'll pay in interest overall.

Adjust your budget for the personal loan payment

Going forward, you'll make monthly personal loan payments. You can also pay extra if you have the cash to do so. Once you know how much your personal loan payment will be, make sure you're setting aside enough money for it in your budget. You might even consider setting up automatic payments from your bank account so you don't forget to make them.

Alternatives to using a personal loan to pay off credit cards

Personal loans aren't the only way to pay off credit card debts. Here are other options to consider.  

Debt snowball

The debt snowball method is a popular way to pay off credit card bills. Here's how this method works:

• List your debts from lowest balance to highest.

• Pay as much as you can to the smallest debt on the list each month, while paying the minimums to everything else.

• Once you pay off the first debt, roll its payment over to the next debt on the list.

You continue snowballing payments until all your debts are gone. The debt snowball can be motivating if it helps you knock out the first few small debts quickly, even if they weren’t the most costly debts you had. 

Balance transfer card

Balance transfers allow you to move money from one credit card to another, ideally at a lower interest rate. Many credit card companies offer balance transfer cards that let you pay zero interest on transferred balances for a set period of time. Once that promotional period passes, you’ll pay the normal interest rate on any remaining balance. 

The upside is that you could save big on interest during the promotional period, especially if you're able to knock down the entire debt before the promotional period ends. Most balance transfer cards charge a fee ranging from 3% to 5% of the balance.

The downside is that you might not be able to pay off your balance at the low promotional rate. Balance transfers could be a good one-time strategy, but credit card juggling generally isn’t sustainable long term.

Debt relief

Debt relief simply refers to different solutions for handling debt. That can include:

• Debt negotiation

• Credit counseling

• Debt management plans (DMPs)

Debt negotiation, also known  as debt settlement, means asking your creditors to accept less than you owe and forgive the rest. That could help you significantly reduce your debt. You can negotiate debts yourself or work with a reputable debt relief company. 

A credit counselor can review your budget to help you come up with a plan for paying off all of your debt. 

Debt management plans are structured repayment plans set up by credit counselors. They are designed to fully repay your unsecured debt in three to five years.